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The impact of sovereign rating changes on firm activities

Nguyen, M. A. (2023) The impact of sovereign rating changes on firm activities. PhD thesis, University of Reading

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To link to this item DOI: 10.48683/1926.00112810


This thesis examines the impact of sovereign rating changes on domestic firms’ activities. The first empirical chapter investigates the impacts of sovereign ratings on corporate investments. Prior literature focuses on the sovereign ceiling in explaining sovereign-corporate spillovers. I find that government debt overhang is another important channel for the spillovers. Specifically, firms domiciled in a recently downgraded sovereign reduce investments, even if their credit ratings were unchanged following the negative sovereign rating event. Public debt overhangs exacerbate negative impacts of sovereign downgrades on corporate investments. The next chapter examines heterogeneous effects of sovereign rating actions on investments. High leverages magnify negative impacts of sovereign downgrades. Poorer performance, lower investment opportunities and financial constraints are factors reducing a firm’s capacity to buffer the negative leverageinvestment relationship following sovereign downgrades. Cash holdings are associated with higher levels of investment for high leveraged firms following sovereign downgrades. The final empirical investigation is on the relationship between sovereign downgrades and corporate trade credit policies. Firms increase their trade credit following sovereign downgrades. The impact of sovereign downgrade on corporate trade credit is consistent and broadly independent of firms’ products, degrees of financial constraints and market power. Further investigations find that credit extensions are related to different public debt-to-GDP levels during sovereign downgrade periods. In summary, sovereign rating changes plays an important role in firm behaviours, even in cases of firms without credit rating change following the sovereign event. This thesis raises caveats against excessive fiscal expansions for demand stimulus given the negative externals on corporate sectors, hence, negative implications for the aggregate supply. Regulatory attentions on corporate leverages, trade credit and risk management policies are among important practical implications.

Item Type:Thesis (PhD)
Thesis Supervisor:Tran, V.
Thesis/Report Department:ICMA Centre
Identification Number/DOI:
Divisions:Henley Business School > ICMA Centre
ID Code:112810

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